Personal finance during the plague: self-employment (1)

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I’ve been self-employed for a long time now, and loyal readers know I’m a relentless advocate for self-employment. As I never tire of saying, not everyone should be self-employed because not everyone wants to be self-employed, but a lot more people should be self-employed than currently are. Since I’m writing this series on personal finance during the plague, I want to take the opportunity to recapitulate some of my typical arguments, and make a few more, in the context of the present crisis.

Your job is gone and it’s not coming back for a long, long time

The speed and scale of job loss in the last month has been staggering, with no historical precedent I’m aware of. Even during the Great Recession professors continued to teach, civil servants continued issuing marriage licenses, librarians continued filing books (or in my case, archiving Civil War-era sheet music), restaurants kept preparing meals, and bartenders kept mixing cocktails. Last month, all those jobs disappeared.

Of course, jobs are lost all the time, and most people who lose a job find a new one relatively quickly. Even in a city with a thriving restaurant scene, some restaurants are always closing and their employees lose their jobs. The difference is that most of those employees, most of the time, are usually able to find relatively similar work relatively quickly. Even in industries that have steadily shrunk their overall employment over time, like manufacturing, most laid off employees will find new work fairly quickly, while others who are already near retirement may choose to accelerate their plans and retire at age 62 instead of 65 or 70.

When today’s emergency restrictions are lifted, the situation will be totally different. Some furloughed employees will be able to return to work relatively quickly, while a huge amount of economic activity will be permanently displaced. Do not confuse this for pessimism; my preference would be for an enormous amount of economic activity to permanently disappear. Of course there will still be work for the best fine dining chefs, the best servers, the best sommeliers, the best mixologists, and the best hosts (or at least the ones with the best connections). But statistically, that’s just not very likely to be you.

In other words, waiting for “your” job to come back is a fool’s errand, and just puts off making the decision about what you will do next.

But unemployment benefits have been extended and expanded!

Time for the good news: if your work history makes you eligible for unemployment benefits, you’ll receive a $600 weekly bonus payment (as soon as your state gets its act together) until July 31, and are eligible to receive your standard unemployment insurance benefit for 39, rather than the usual 26 weeks. If the crisis persists, I suspect the federal top-up payment will be extended as well, although that’s just speculation at this point.

Additionally, the weekly work search requirements to continue receiving unemployment insurance have been suspended in most, if not all states.

In other words, you’ve got between 4 (with federal top-up) and 9 (excluding the top-up) months to figure out what to do next. My suggestion is: self-employment.

Self-employment lets you earn income without threatening your benefits

Here it’s important to understand a few different moving pieces of the US welfare state.

First, health insurance. There are essentially three ways people below age 65 can receive health insurance: employer-sponsored insurance, subsidized ACA exchange plans, and Medicaid. The most important thing to keep in mind is that if your employer offers health insurance meeting certain minimum requirements, you are categorically ineligible for ACA exchange subsidies and Medicaid. That means every time you move between employers that offer health insurance, your income can fluctuate much more wildly than the difference in your pay: earning $60,000 per year at a company that covers the full cost of health insurance and earning $60,000 per year at a company that requires you to pay $1,000 per month for a plan with a $13,500 out-of-pocket maximum is the difference between earning $60,000 per year and earning $34,500 per year in take-home pay. This is the primary reason people overestimate the difficulty of becoming self-employed in the United States: they want to match their self-employment income to their employment income, without taking into account that their employment income was actually much, much lower than the number printed on their paystub.

Second, the Supplemental Nutrition Assistance Program, which old people still call “food stamps” for the same reason they call the Czech Republic “Czechoslovakia.” SNAP benefits are based on monthly income, starting at about $194 per month in benefits for single adults, and decreasing as monthly income increases. This functions as a base income of $2,328 for unemployed single adults, and is the most important remaining anti-poverty measure in the US toolkit. But SNAP benefits come with an important restriction: while those working 20 or more hours per week are eligible for indefinite SNAP benefits, you’re only eligible for 3 months of benefits every 3 years while working less than 20 hours per week. That means it’s essential, in order to continue to qualify for SNAP benefits, to work for 20 hours per week or more. For this purpose, hours spent on self-employment count as hours worked. Here, the so-called “gig economy” is illuminating. I’m on the record that the idea of classifying Uber drivers or delivery personnel as “independent contractors” is an absurd violation of federal law, and I’m glad that states have ever-so-tentatively started to crack down on the practice. But when it comes to SNAP benefits, the gig economy is your friend, since every hour you spend on self-employment is an hour worked, whether or not you’re being paid for it. You don’t need to be logged into any app in order to be working, if you’re working for yourself. When you’re washing your car, you’re working. When you’re getting gas, you’re working. When you’re on private forums encouraging drivers to organize for better pay, you’re working. This makes it easy to trigger the weekly work requirements of programs like SNAP. I cannot stress enough, this is not fraud: this is the gig economy. If your boss says you’re self-employed, you better act like you’re self-employed.

You’re gonna like the way your taxes look

The final piece of the self-employment puzzle is benefits administered through the tax code. The most important of these are the Earned Income Credit, the Retirement Savings Contribution Credit, and contributions to individual 401(k) plans.

The Earned Income Credit famously phases in along with income, plateaus, then phases out as income rises past a certain point. Importantly, self-employment income counts as earned income. That means if your income year-to-date is below the phase-out point, and especially if it’s below the plateau point, you don’t suffer any penalty by earning additional income, and may actually increase the amount of your refundable credit (depending on how much you earned so far in 2020).

The Retirement Savings Contribution Credit is not refundable, but can be used to offset any tax owed, including the repayment of ACA subsidies. For low-income self-employed people, this is a brilliant strategy, since it turns Roth IRA contributions into turbo-charged traditional IRA contributions: the Roth IRA permanently shields your contribution from dividend, capital gains, and income taxes, and also generates a credit to offset ordinary income taxes.

Finally, self-employment gives you access to individual 401(k) accounts, which allow you shield the usual $19,500 in annual income from taxes, while also making “employer” contributions much more generous than any employer you’ve ever had.

Conclusion

Self-employment is a vast subject, and self-employment during the plague is self-employment on steroids, so I’m going to leave it here for now. There is, of course, much much more to come on this subject.

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